Bethesda's Fundamentals Post-Covid Could Help Bring Down Its Elevated Office Vacancy
More than one-fifth of Downtown Bethesda offices are vacant, including two large blocks of available space in prominent high-rise towers, but local experts see positive signs that can help fill those empty offices.
![Placeholder](https://cdn.bisnow.net/assets/website/placeholder.png)
The dense, suburban office market is drawing demand from small and midsized companies with employees who live outside of D.C. and don't want to commute downtown, experts said. And Downtown Bethesda has no new office space under construction today, limiting the competition for developers trying to lease up space.
The market saw the delivery of several major office projects during the pandemic, including Stonebridge's Avocet Tower and The Wilson from Carr Properties. Last year Marriott International moved into its Downtown Bethesda headquarters, helping boost the submarket's 2022 net absorption to 550K SF, according to CBRE. But the submarket still has a vacancy rate of 22.5%, two percentage points above the county average.
As large office tenants downsize and look for space in mixed-use destinations, industry experts believe Bethesda has the fundamentals necessary to compete against the top office submarkets in the region.
"A lot of times we don’t fly as high as some of the Virginia markets, but we also don’t decelerate as greatly as some of them do," said Phillip McCarthy, an executive managing director at Transwestern. "[Bethesda] plays well to our post-Covid world where it’s outside of the CBD core but still an urban setting. Closer to people’s homes but it still has a good vibe to it."
Downtown Bethesda has seen renewed momentum over the past year in large part thanks to the arrival of Marriott, which occupied its 734K SF headquarters at 7750 Wisconsin Ave. in September. That opening drove the submarket to 557K SF of positive absorption on the year, the only suburban Maryland submarket to log a positive mark.
But the submarket’s bread and butter is midsized leases, often from tech, services and government contracting firms, McCarthy said. The broker said those deals have largely remained steady in recent years and contribute to the vibrancy of Bethesda’s mixed-use downtown.
“There are plenty of examples of large users in Bethesda, but the bulk of that market is the 5 to 15K SF user,” McCarthy said. “It insulates the market a little bit.”
The Bethesda/Chevy Chase submarket has 100 office buildings totaling 12.6M SF, according to CBRE. Its vacancy rate stood at 22.5% in Q4, slightly above the Montgomery County average of 20.5%, per data from CBRE. That elevated vacancy rate is fueled in part by newer deliveries and properties that recently completed or are expected to undergo renovation.
![Placeholder](https://cdn.bisnow.net/assets/website/placeholder.png)
The 369K SF Avocet Tower, for instance, was built on spec and delivered in 2022 with a Long & Foster lease in place for nearly 21,841 SF. Joint venture partners Stonebridge and Invesco Real Estate have since inked deals with two real estate investment trusts, AGNC and Global Medical REIT, to occupy a combined 35,551K SF in the new office tower at 7373 Wisconsin Ave., according to CBRE.
The developer declined to comment on the amount of available space remaining, but it hasn’t announced additional leases beyond those deals, which would bring its occupancy level to roughly 15.6%. That would leave about 312K SF remaining available in the building.
Nearby, Boston Properties is also eyeing a makeover for the Wisconsin Place office property, McCarthy said.
And Stonebridge recently completed a $24M renovation of 7500 Old Georgetown Road, the 16-story building next to the Bethesda Metro station that formerly housed the headquarters of Clark Construction. The property is still marketing 120K SF of vacancy.
Doug Firstenberg, principal of Stonebridge, acknowledged that some of his firm’s projects have suffered from a regionwide softening in demand, but he believes they are still well-positioned to appeal to tenants as some of the newest products to deliver in the submarket.
![Placeholder](https://cdn.bisnow.net/assets/website/placeholder.png)
What’s more, there are no office projects currently under construction in downtown Bethesda, according to CBRE, meaning Stonebridge’s newly delivered projects have little competition to absorb demand for Class-A space.
“The office leasing has gone slower than we hoped as tenants are still working through the office plans for the future,” Firstenberg said in emailed comments. “Activity has picked up in 2023 in terms of tours and active negotiations. This activity has continued to demonstrate the attractiveness of Bethesda as a premier office location.”
McCarthy is part of the Transwestern team handling leasing for the former Clark headquarters. He said the construction firm's move to Northern Virginia had less to do with Bethesda and more to do with Clark's executives wanting to work in Northern Virginia, and it still maintained a smaller presence in the Bethesda building.
"What that says to me is that the decision-makers in Clark live in McLean, Virginia," McCarthy said. "They’ve stayed in 30K SF ... Which is great, we’re elated to have them there. But the headquarters move to Virginia is because that’s where the leadership lives."
Other newly built trophy office buildings in Downtown Bethesda have performed well in recent years. McCarthy called Carr Properties' The Wilson office building the "Rockefeller Center of Bethesda" due to its height and prestige as one of the biggest projects ever to deliver in the submarket.
That property completed tenant build-outs by the end of last year and is now 100% leased, according to Carr. Walker & Dunlop, which signed one of the final leases for the building, moved into three floors totaling 59K SF in January 2022.
"It was the easiest lease-up in the history of mankind," McCarthy said. "We literally sold that project on one iconic image of The Wilson."
The dynamics underlying Bethesda’s office market are different than what experts predicted in the early phase of the pandemic, said Stephanie Jennings, Mid-Atlantic research director for CBRE.
She said the hub-and-spoke model that seemed to heavily favor suburban offices never fully materialized. But Bethesda, with its proximity to tony neighborhoods like Potomac and other areas where former D.C. commuters lived, is nevertheless benefiting from its status as the largest submarket in D.C.’s suburbs to the north.
“Mixed-use markets offering shorter commutes — like Bethesda — have generally performed better than others,” Jennings said in emailed comments. “In Suburban Maryland, Bethesda is still the most desirable submarket for office users despite the vacancy rate.”